Amidst ongoing speculation that Australia’s over-swollen housing bubble could burst at any given moment, the detractors are insisting that now is not the right time to flip properties. And the naysayers are not altogether wrong. After all, Australian households have tripled their average level of household debt since 1990 – we should probably tread with caution. But for entrepreneurial investors, the lure of unimaginably low interest rates is too seductive to ignore.
If you’re tempted to try your luck investing in the property market, give the transaction plenty of thought. With Australian property prices inflated to unprecedented levels, flipping properties is a tad more complex than flipping an egg. In fact, if you get things wrong, your investment could well turn into a rotten egg. But if you play your cards right, your investment can still land with the sunny side up.
The Perfect Flip
If you want to make swift, worthwhile returns on your investment property, adhere to the three golden rules of the perfect flip.
Rule 1. NEVER buy at or above market value
The main objectives of flipping properties are: 1) to minimize risk, and 2) to maximize your ROI. With that in mind, you should aim to buy in at below market value, preferably at the low end of the market. As a rule of thumb, only buy an investment property when it is 15-25 percent below market value. In the current property market, this is difficult to achieve – but not impossible.
Rule 2. Go For The Makeover, NOT The Facelift
Presumably, your investment property will need some kind of renovations before you can feasibly resell for a higher price. Don’t get bogged down in extensive renovations and remodeling – keep it cosmetic. A basic building inspection will identify any structural issues that might complicate the cost and scale of renovations. You don’t want to reinvent the wheel here. Kitchen and bathroom renovations are popular value boosters (see graph below). A simple cleanup of the front yard and façade can work wonders too, by boosting your curb appeal.
Rule 3. D-I-Y Where Possible
Unless you know a guy who knows a guy, renovations are expensive. For smaller renovation projects, like painting, gardening and cleaning, try to accomplish as much as you can with your own hands. By adopting the DIY approach, not only will you save money; you will feel an invaluable sense of prideand satisfaction when you eventually flip the property.
Renovation Costs & ROI
You can save a fortune by tackling the bulk of your renovation projects DIY-style. But of course that requires time – a luxury that we don’t all have.
If you don’t have the skills and time to do your own renovation projects, have a good think about how much money you’ll need to invest in order to bring your property to the desired standard. Talk to your Real Estate Agent to map out a basic cost-benefit analysis.
Organise a building inspection to ensure that there are no hidden structural issues that might compromise the propery’s value down the track. If your site is in excellent condition, on a flat level block with no drainage issues, you can expect to spend anywhere from $3000 to $3600 per square metre for internal renovations, extensions or additions. For example, to renovate a small kitchen (3 square metres), your costs are likely to run from $9000 to $10,800, depending on which finish you go for.
When trying to sell a property, shabby floors can be a deal-breaker. Don’t shy away from the cost of flooring. Your investment will pay for itself – you can potentially increase the value of your home by 2-3 times the cost of your investment.
For outdoor improvements – like decking, patios and verandas – renovation costs are likely to range from $1800 per square metre for basic work to $2400 for deluxe work.
Landscaping costs vary widely. Anything that’s labour intensive – like paving, excavation and retaining walls – will come at a price. Comprehensive landscaping projects can easily surpass $20,000. Most of the sophisticated projects featured on glossy landscaping websites would cost at least $50,000 to recreate.
Remember: the investor’s priority is to maximise property value whilst only spending a minimum amount of time and money on the improvements. Luckily, there are plenty of ways to create beautiful, easy-care gardens that potential buyers will love.
For example, creating a paved outdoor area will help you sell or rent your investment property. Everybody loves outdoor entertaining during summer. Or plant some good-looking, low-maintenance trees – like Camellias – to give your yard a leafy charm. A smart investment in landscaping can deliver up to 400 per cent return when it’s time to sell.
Market Analysis: Renovation Trends in Australia
Recent growth in spending on property renovations, additions and alterations suggests that homeowners and investors alike are taking advantage of the low interest rate climate to increase the value of their homes and investment properties.
The newest edition of the HIA Renovations Roundup projects that renovations activity will increase by 3.9 per cent this year with further increases forecast for 2016. Renovations activity accounted for an estimated 36.3 per cent of total residential construction during 2014/15. ABS national accounts data indicate that the volume of renovations activity totaled $28.55 billion in seasonally adjusted terms during the year to June 2015.
After a slump in activity between 2011 and 2013, this new growth in renovation investment is a welcome change.
“Australia’s home renovations market is a major strand of consumer spending and will be worth just under $30 billion this year. Its labour intensive nature means that it has substantially positive knock-on effects for employment,” noted HIA Senior Economist Shane Garrett.
The recovery in renovations activity is being pushed along by the strength of dwelling prices in Sydney and Melbourne, which is encouraging home equity-financed renovations work. The Spring 2015 Edition predicts that the total volume of renovations activity will grow to $30.62 billion by 2018.
“Over the coming years, the modest recovery will continue. However, the recent tightening of mortgage credit conditions casts an unwelcome shadow,” Garrett concluded.
According to the November 2015 Housing Institute of Australia’s (HIA) Renovations Market Survey, the most common value of renovation job is between $12,001 to $40,000 – 22 per cent of renovators cite this as their typical job value. The Survey reveals that materials costs have emerged as a heavier pressure on renovators, possibly due to the effect of the Australian dollar on the cost of imported goods.
Apart from repairs and maintenance, renovations demand is strongly concentrated in kitchen (17 per cent) and bathroom (16 per cent) jobs, with substantial demand also coming from ground floor extensions (10 per cent) and external work (9 per cent).
Jerry Tyrrell has over 40 years’ experience in the building, architectural and timber pest industry and founded Tyrrells Property Inspections more than 30 years ago. Since then Jerry has supervised the inspection of, or directly inspected, over 90,000 buildings and homes. He has hands-on experience in most building trades, and has designed, built, supervised and project managed building projects from $5,000 to $8m.